The idea of going bankrupt in Ireland has changed dramatically since the introduction of the new bankruptcy rules at the beginning of this year, 2014. Bankruptcy is no more seen as a stigma or a sentence of living a substance life forever. It has matured into a system of relief and protection for people who got themselves into financial difficulties which they have no foreseeable way of escaping from. Bankruptcy has become one of the now many debt relief solutions now available as in most developed economics. It just took a massive property and economic crash for Ireland to catch up.
So how can bankruptcy be a relief?
Well the first and most important thing to understand is when someone goes bankrupt it doesn’t mean they lose their job, home, car, all their personal possessions or cannot have an income. In fact when someone goes bankrupt they get rid of all of their debts so they usually end up having more disposable income in bankruptcy because they are not trying to constantly catch up with loan or credit card payments.
The day someone is declared bankrupt is the day all debt is gone! Now that is relief! In fact creditors are not allowed to contact the debtor after they are declared bankrupt. No more phone calls, endless letters or feeling of dead on seeing the postman coming up the drive! The bankrupt does not have to wait 3, 10 or even 20 years to get rid of the debt. After bankruptcy there are no constant reviews of income, personal circumstances or watching every move.
Bankruptcy will have a significant negative effect on someone’s credit rating and ability to borrow in the short term. However, if someone is considering bankruptcy it is very likely their credit rating is shot anyway! However, with the shortened bankruptcy period of 3 years, this poor credit will not last forever. The bankruptcy process is a re-start and second chance policy. It is there to help over stretched borrowers and it should be used as such. After someone is declared bankrupt they have no overhang of debt carrying on into the future and will in the long term be a better credit risk then someone who has an insolvency arrangement or split mortgage hanging over them for 20 years.
What happens to the family home in bankruptcy is the big question. Depending on the circumstances of the debts and what the bankrupt can afford it is be possible for the family home to be kept. The vital questions here are a) is the current home loan being paid b) does the bankrupt want to keep the home and c) is the home in negative equity? Depending on the answers to these questions it will be possible to hold on to the family home.
Let’s look at an example. A couple both working (one in the public service and one in the private sector) earning €7k per month after tax with 3 teenage children have over the past 10 years purchased 2 rental properties and have a family home which they topped up their mortgage to get a deposit for the second rental property. The crash comes, their income falls, rental income falls and property prices fall. Trying to keep up payments they borrow from a credit union and run up an overdraft. In the end they cannot meet all loan payments and seek professional advice.
They end up with 2 properties in €300k negative equity, a family home in €50k negative equity and unsecured loans of €20k. Their income is now down to €5k per month. Their home loan repayment is €1,500 per month. Their income is now below the reasonable living expenses allowed for a family of their size as set out by the Insolvency Service of Ireland (ISI) so they would not qualify for any insolvency arrangement. This also means that they will not have any payment order made against them in their bankruptcy period. The couple will be able to service their home loan repayments of €1,650 if they have no other debt to pay off. So they have total debts of €320,000 (after selling off the rental properties) excluding the home loan. If they enter into a long term restructure with their banks they will be paying this off for 20/30 years. This could put their home loan payments in jeopardy as well. If they take the bankruptcy route all of the €320,000 would go.
The only loan payment they will now have to make is their home loan. Because there is no equity in their family home the official assignee will have no interest in it. So if they are able to maintain the mortgage payments they will be able to retain the home.
The bankruptcy period lasts for 3 years during which time the bankrupt will not be able to borrow in excess of €650 without telling the lender they are an un-discharged bankrupt. They will have to declare any material increases in their income (in excess of €500 after tax per month) to the assignee and if they have any windfall gains such as a lotto win or inheritance. Otherwise they are free to get back to normal living free of the massive debt burden.
A detailed guide to bankruptcy is available at www.neofinancial.ie or from:
Paul C Carroll Accountant